In August 2020, two appeals court decisions, one in the United States and one in the United Kingdom (“UK”), were rendered in important cases involving interpretation of Fair, Reasonable and Non-Discriminatory (FRAND) obligations for standard essential patents (SEPs). These twin decisions appear to bring trans-Atlantic decision making on issues of FRAND obligations in a standard setting environment closer together than has been the case for some time. The decisions also recognize recent legal and economic understandings that apply a more balanced approach to defining FRAND obligations such that, still within the context of assuring that implementers can profitably sell the final product, SEP holders receive sufficient reward to incentivize their risk taking and willingness to partake in societally beneficial standard-setting activities.
In the first decision, the Ninth Circuit Panel reversed the District Court decision in FTC v. Qualcomm, Inc. The District Court decision favored the Federal Trade Commission’s (“FTC”) position that patent holder Qualcomm’s conduct in refusing to license rival chipset makers (and insisting on a SEP license from handset makers as a condition for receiving chips) was anticompetitive. In the second decision, the UK Supreme Court affirmed the lower court decision in Unwired Planet v. Huawei that largely favored patent holders. This case involved the patent infringement claims of Unwired Planet, a patent assertion entity (PAE), against implementer Huawei under telecom standards developed by The Third Generation Partnership Project (3GPP), where ETSI, an international standard setting organization (SSO), serves as the secretariat. Unwired Planet had offered to license its SEPs on a worldwide basis, but Huawei objected to the royalty rate as not FRAND and to the inclusion of SEPs beyond UK SEPs. The UK Supreme Court held that an English court can enjoin infringement of UK SEPs where the infringer is willing to take a UK license but refuses a worldwide license that the court has determined to be FRAND.
The Ninth Circuit Panel’s Qualcomm decision is notable for several reasons. First, it states that the potential violation of a FRAND commitment made by a SEP holder does not give rise to antitrust liability as long as it springs from the exercise of lawfully gained monopoly power where there was no overtly deceptive conduct that led to inclusion of its SEPs in the standard. It appears that the policy arguments of several intervenors, including an unprecedented amicus brief by the United States Department of Justice (“DOJ”) stating that contract and patent remedies are more appropriate to handle FRAND disputes than the antitrust laws, influenced the panel. The panel reasoned that there was no harm to competition from the legitimate exercise of SEP monopoly power and to limit that exercise through the application of the antitrust laws could reduce risk-taking and innovation.
The Ninth Circuit panel also rejected the District Court’s finding that Qualcomm’s royalties were unreasonably high (or non-FRAND) because they were imposed at the handset level, as opposed to at the level of the smallest salable patent practicing unit (SSPPU), which arguably is the modem chip. The panel found that there was no competition law principle that requires that patent royalties be based on SSPPU and that such a rule would conflict with the “comparable license” approach to patent valuation, noting that sophisticated parties routinely enter into licensing agreements that set royalties as a percentage of the final product price. From an economic perspective, evidence from actual licenses seems preferable to constructing hypothetical negotiations based on a principle (SSPPU) that the licensor has not used.
Similarly, the UK Supreme Court Unwired Planet decision moves towards a more balanced approach to defining FRAND obligations. Earlier cases under European Union (“EU”) competition law (e.g., Huawei v. ZTE) applied the antitrust laws to FRAND licensing disputes where there is a “willing” licensee, finding an “abuse of dominance” where a SEP holder seeks an injunction under these circumstances. More recent decisions in EU member states (e.g., the German Federal Court of Justice’s decision in Sisvel v. Haier) took steps to limit the impact of these earlier decisions, making it more difficult for a licensee to argue it was “willing” if it failed to enter into good faith negotiations or engaged in other opportunistic conduct. The Unwired Planet decision is the most decisive step away from the earlier EU cases and appears to move the EU position much closer to the position of the Qualcomm panel.
In particular, the UK Supreme Court relied on ETSI’s written patent policy that expresses the need for “balance” between implementers and SEP holders to support its finding that SEP holders may seek an injunction against implementers who do not enter potentially FRAND licensing agreements. The Court found that Unwired Planet had shown itself to be a willing licensor by its offer of a global license to Huawei and that an injunction could be warranted if it was necessary to prevent continued infringement. Otherwise, it would be “difficult for the SEP owner to enforce its rights,” forcing the owner “to accept a lower royalty rate than is fair” and denying “the fruit of its research and innovation.”
The UK Supreme Court also opined regarding the non-discrimination prong of FRAND, finding that it was not a separate element from the obligation to license on fair and reasonable terms. Moreover, non-discrimination did not mean that patent terms could not differ due to normal commercial justifications, as long as there was a single royalty price list available to all. Nor were licensors obliged to give “most-favorable-licensee” treatment to every licensee, which could discourage price competition. Effectively, the FRAND obligation was judged not to prohibit Unwired Planet from giving better effective rates to another licensee than to Huawei, as long as both terms could be deemed FRAND.
Both the Qualcomm and Unwired Planet judgments clarify some, though not all, important legal and economic questions relating to the balance between SEP holder and implementer rights implied by FRAND commitments. However, these decisions, which in each case were the culmination of litigations that had lasted for years, also revealed how fractured and hotly debated these issues still are, as the terrain now appears to tilt to a more patent-holder-friendly regime on both sides of the Atlantic.